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tv   The David Rubenstein Show Peer to Peer Conversations  Bloomberg  July 21, 2018 10:00am-10:31am EDT

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alix: commodities in crisis. copper leaves commodities into corrections territory. and alcoa cutting its 2018 profit forecast, the latest victim in president trump's trade battle. room for everyone. cpi leader peter coleman talks about china's rising lng demands and how it can absorb the junk in u.s. exports. ♪ alix: i'm alix steel. welcome to "bloomberg edge."ities ed. --
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it's 30 minutes focusing on companies, physical assets, and the trading behind the hottest commodities with the smartest voices in the commodities business. first, we kick it off with the investor take on our big story. joining me is a capital management cofounder and portfolio manager for titan. our spotlight on commodity slipping into correction territory. oil no exception. if you take a look at this terminal chart, it shows dramatic swings for brent we have not seen since 2016, but said hey,audis we've had enough, and swoop in. they will only export barrels that are earmarked to match confirmed listing requests by and users and is not trying to push oil into the market beyond its consumers' needs. what has happened over the last week and a half for oil? tina: quite a lot has happened. it has been remarkable in terms of volatility. brent on its own has lost 10% in two days. that is stunning, considering the market has been relatively
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range bound for a while now. alix: you get the sense that the saudis wanted a cap on volatility, or they wanted to cap the downside with that statement? tina: if you look at what's happening with brent, if you look at the next month and after that, the market is currently in contango, which for the markets is not a good sign. they have been trying to convince their friends to take care of it. i think what we saw today was announcement that they did not want to make the market think they are going to flood it forever. alix: this is basically the contango you're talking about. the brent 2-3-month spread. if it is negative, it is conta ngo, so the current month is going to be cheaper than the back month. did you buy the dip? >> the thing you have to remember, there is a lot of noise and a lot of moving parts right now. you have saudi arabia, russia, iran, venezuela, permian differentials, right? there is just a lot going on. but the thing you need to remember is that the end of this year, global oil inventories are
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going to be significantly lower. the last time they will have been this low was 2013. and you remember where the oil price average was that year, around $100. and then you have imo 2020 around the corner. so we think you just need to look at what's going on with inventories and what that means for prices. alix: and you can see that in the forward curve. we talked about how the back end has started to rerate, that you -- but tina, you say we are seeking weakness all across the curve. in your work, is that a temporary phenomenon or is that going to persist? tina: we're hearing different things. i think if you look at the speculative position and trader reports, what we have seen is a hell of a lot of people who have been long in the market, so much that it starts to look like a short-term bearish indicator. you run out of other folks who can still bet on long oil. if you look beyond the front month, you see a lot of weakness, especially in brent. wti and brent have been flirting with the hundred day moving
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average -- 100 day moving average. falling below it. brent has settled below, and wti may well do so today depending on what happens. alix: if you had a longer-term bullish view, but if you look at what oil equities have done versus the oil price, they have not had the same kind of moves as oil. whether you are looking at services, emts, integrated, mlps. what sector holds the most value if we see the rating to the upside? john: so in 2019, we think international oilfield spending is going to be up massively. global spending should be up 10% to 15% next year. now, the u.s., given the differentials, is going to tap the brakes. now almost all of the growth will happen internationally. so we think you should have exposure to companies like national oil of arco, neighbors, rowing, tidewater. we also think u.s. midstream is very interesting. we think differentials are going to be here for a while, not just in oil, but natural gas.
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energy transfer very much exposed to that, and owns that natural gas footprint. and we also like canada. so what is going on in the u.s. right now and is about to go on in the permian happened in canada last year. now, these companies are still making a lot of money. things are getting better, they are sorting out some of their problems, so those are three things we like in the portfolio right now. alix: mlp's would be an obvious place to go, but they obviously underperformed and that was a tax law issue. but that might have changed around. tina: we had a decision last night from the federal energy regulatory commission clarifying their rules. when they had announced this idea, it really sent mlp's into a tailspin. you saw the larry and just tank. and we saw companies as a result saying, maybe the mlp structure is not for me. start to talk about combinations, certainly energy transfers, saying they'll potentially combine to get rid of some of the mlp structure, which is very complicated. we also saw boardwalk snapped up
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by lows. i think what they did last night was give the market a little more encouragement. they acknowledged they cannot go back retroactively and set rates. so that is very good if you're an mlp. you don't have to refund potentially years and years of overcharges. and that is really giving the mainstreams a nice little boost today. alix: we take a look at going forward in the range. it used to be a 50-60 range. that's what we have seen for oil and what everyone has been talking about. john, now are you envisioning a range where you can see 70 to 80? how do you factor that in when you wind up apparently having a saudi put? john: when you look at where inventories are going to be at the end of the year, when inventories are at that level, oil prices are generally closer to $100 and $60. so that is where we price it going into the end of the year. alix: thank you. good stuff. let's get your takeaways. john's takeaway is tight markets. and someoffshore puts
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energy credit. tina, her takeaway is an orderly selloff. short-term swings are not showing up in equities. you want to watch for the big oil earnings next week. exxon, always love that on friday. our thanks to titans jon delano j and bloomberg's tina davis. coming up, why gold isn't the safe haven you are looking for. prices are down 11% since the january high. and as we had to break, what led to selloffs this week? industrial metals, big moves. copper, tin, lead, and nickel. nickel is the big underperformer , off by 6%. we will break down the anatomy of the base metal selloff. this is "bloomberg commodities edge." ♪
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alix: i'm alix steel. this is "bloomberg commodities edge." it's time now for the data dig. we delve deep into the market trends of the week. first up, the oil inventory
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numbers. two highlights. one, cushing stocks in padd two were below 25 million barrels for the first time since 2014. plus, overall u.s. production hit 11 million barrels of oil a day for the first time ever. and then, it was the chart that shook the market. the historical spread between the dollar index and the bloomberg commodity index. take a look here at the 100 day correlation, -.35. the inverse correlations, so the dollar keeps rallying the commodities keep falling. part of what caused the turmoil and selloff this week. and, president trump strikes again. the administration has opened an investigation into uranium to see if imports actually threaten national security. and reactors here in the u.s. get the majority of that uranium from canada, as well as russia and australia. so yet another wildcard being put on the commodity tariff table. all right, u.s. aluminum tariffs also take a bite out of alcoa. the company lowered its 2018 profit forecast. >> we are reducing our 2018 outlook to reflect recent market
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prices. tariffs on aluminum imports, increased energy costs, and operational impacts. alix: joining me now is bloomberg's metal and mining reporter joe deaux. you spoke to alcoa's ceo before the results were announced. what did you learn about the tariff impact? joe: well, that it has an actual impact. we were going into the earnings call and talking in the background, saying there is probably going to be focus on tariffs. when i spoke to roy harvey, he launched straight into it and said listen, we are going to put it all out there. we are taking a $15 million cost from these tariffs because we produce more aluminum in canada than the u.s. in the last earnings report, they did think canada would be excluded. now everybody has put that into their model, saying no, they were not excluded. that hits them on the front-end. that was part of the reason why they had to downgrade their ebitda forecast for 2018. alix: the irony of that, it is a u.s. aluminum manufacturer, 20% of its manufacturing is in canada.
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-- 20th percent of its production in canada. production is in canada. most of that all comes to the u.s. and now has a tariff on it. joe: we have big smelters in canada. we ship it back to the u.s. this is the thing we have tried to tell people so much in our stories. the biggest u.s. aluminum producer, the most iconic name in the game across the world, is actually getting hit by the tariffs that are supposed to be helping u.s. producers, and i think they made that pretty clear in the earnings, and he certainly made that clear in the call to us beforehand. alix: and the equity underperforming aluminum price no matter where you look. thank you so much, bloomberg's joe deaux. let's get into the ring. a big call of the week. gold hitting a one year low. bnp paribas cutting its forecast this year to 1250 and 1100 and 2019. joining us now is the analyst behind that call. the head of commodities research joins us from london. good to see you. why the downgrade of gold? >> good afternoon.
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we downgraded gold for really three reasons. dollar strength, the lack of inflationary pressures, and essentially lack of investor appetite for the yellow metal. so gold is facing a number of headwinds and we think the correction we are seeing is likely to pursue over the course of this year. in particular, as the fed keeps hiking rates. alix: i love you put that in terms of the fed hiking rates. if you have a chart with a three-month t-bill versus gold, finally the short-term bills are worth something. cash is finally worth something. so what, if anything, is the opportunity cost to hold gold? harry: i think you just nailed it right there, the opportunity cost of holding gold. when rates are rising, whether it be the fed hiking rates or the u.s. government issuing more short-ended bonds that will ultimately lead to higher rates, you are looking at an opportunity cost defined in terms of the nominal rate minus inflation and in this case, the real rate. and the real rate is rising and therefore investors are shying away from holding gold.
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you know, when you think about it, why hold an asset that doesn't yield anything when you could go into treasuries or even go into equities with decent earning report seasons going on? alix: so how come you are not even more bearish? harry: i think if you look at the bloomberg survey forecast for gold, we tend to be right down there in terms of the pack. so at this juncture, we understand that the u.s. dollar will remain stronger for longer, however we don't know how long and that depends on the escalation of trade issues between the u.s. and china pans out. so as much as we could see the euro-dollar trading around 1.15, we're not sure that is going to last until the end of the year. dollar strength is a big part of the downturn in gold, lack of inflationary pressures, of course, and something we haven't touched upon yet is the lack of safe haven demand. because despite the turmoil that we are seeing in trade, people are not going and shifting over to gold. and that is true of other safe haven assets, like the japanese yen that you guys were
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discussing earlier today. alix: 100% agreed. the safe haven bid not coming up, but the other part of the metal market i wanted to hit on is the copper market. if you take a look at copper, -- copper versus all its moving averages, it has done some real damages. at one point, below $6,000 per ton. walk me through the why. is fundamental, what is dollar driven, what is the downside? harry: assuming in terms of the dollar, you know as the dollar appreciates, commodities are in dollars, and naturally as it strengthens, you have downward pressure exerted there. if you look at the downturn of copper since it began, it has really reflected the escalation in trade tensions between the u.s. and china. so copper, as you know, is pervasive in the production of consumer goods, electrical wiring, even in transport. so as tariffs moved on from an initial round to include a further $250 billion worth of -- $200 billion worth of chinese goods, we are looking at sentiment for the use of the mental declining and declining.
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now we will also get news on whether or not the u.s. going to slap tariffs on the auto sector, and if they do we think there is an obvious risk that copper -- again cap of the -- again, the psychological $6,000 per ton support level. alix: harry, great to have you. harry tchilinguirian of bnp paribas. coming up, we will talk about exploding lng demand. that's coming up next on "bloomberg commodities edge." ♪
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alix: i'm alix steel, this is "bloomberg commodities edge." we want to turn now to commodity in chief, when we focus on one executive on the commodity world. today it is peter coleman, the ceo of woodside petroleum. first, a closer look at his company. australia will take home the bronze medal as the world's third-largest lng producer in the world by 2023. it used to sit on the second podium, but the energy revolution in the u.s. changed all that. one of the most exposed is woodside, a top lng producer down under. north america will add 160 billion cubic meters per year to the market. that is the most all of latin america's current annual out -- output. u.s., australia, and qatar will make up 60% of global supply by 2023, and all of them will be
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vying for market share in china. china lng demand is voracious. desperate to limit air pollution, it will turn into the world's biggest importer by next year, and demand will climb 37% over the next five years. right now, china buys the most lng from australia. but the risk for woodside is that this changes. china can buy u.s. lng for as little as $5.50. ,he cost of henry hub plus liquid location and transportation. does woodside need to get more price competitive defend of the u.s., or is there room for everyone to play in the big lng demand pool? i recently caught up with peter coleman, ceo of woodside, who said he likes u.s. competition. peter: what you are seeing is fundamentally different investment models occurring around the world, and that is good for buyers and it is also good for sellers. it means new sellers can get
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into the marketplace when they could not get in there five or 10 years ago. because the market model itself was just one. you only had one way of getting into the market. the u.s. is becoming more a utility model with respect to returns that those gas liquefiers are actually getting overseas. so what used to be a big barrier to entry now has gone away. anybody who can afford to build a plant can build a plant these days in the u.s. but the pricing point that they will get will be pretty much a utility return. for us, we are an integrated buyer, so we go from exploration all the way through to delivering product to a terminal. for us, we a different return profile, and that is what you will find elsewhere in the world , which will be the main model for a long period of time. so we look at it and say, it is fabulous to have the u.s. in there. it is fabulous to have that pricing point. it gives liquidity in the market and it gives optionality in the market. and it actually creates new demand because now people are
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saying, i can make that investment change. i can move from this fuel to gas of the future, particularly if i'm a power generator or big utility, they are 30 or 40 years of business. i want to make sure that their products will be available. so the u.s. economy has actually helped the market grow a lot. alix: what is interesting is that asia lng prices are so high compared to what we are seeing for the u.s.. why do you think that? peter: there are a couple of reasons. one, henry harbour is simply pricing to a point, it doesn't do anything with it so we saw the liquefied. alix: so even if it liquefies it and transports it, it will still be much steeper. peter: there is a couple dollars difference in it. what's the difference? it is competition. it is gas on gas competition. in the u.s., the gas on gas competition, you go to a lot of places in asia, they don't have the indigenous gas supply that
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the u.s. or australia are endowed with. they don't have that competition. they have got to rely on lng coming into that marketplace, so they are competing with everybody else for lng. china is a different market. china actually has gas on gas competition. it has indigenous supply, but it also has extremely expensive pipeline gas coming in from the west. and so some of the pricing in china, in fact lng is far more competitive now thanks to that pipeline. alix: how easy is it to sell when you are marketing it right now? peter: it is hard. it is hard today. it is hard to get long-term contracts. the shorter-term contracts are competitive because there has been a lot of easy supply in the market. new projects have started up and those projects' long-term contracts have not kicked in, typically that's what you do. over a period of time from when
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you think you're going to start a project to when you actually had to deliver your first cargo under your long-term contract. that's because you want to make sure you don't have any liabilities in there. if you actually start up on time or early, you will have spare cargo going into the market. the market over the last year or so has been flush with cargoes coming in. [inaudible] peter: there has been a very competitive marketplace. alix: that was peter coleman, ceo of woodside petroleum. the company just actually walked away from an lng export development with sempra energy in texas. three years after joining that project, the problem low returns. it is time for the bnf brief. what you need to know in the world of alternative energy. california has a power problem. check out this chart. so solar power surging. those are the yellow bubbles there. and as power grows, prices hit the lows of the day. joining me now is a be grace from bloomberg nef. significant?hat
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amy: it's interesting. there is six and a half times more solar in california today than there was five years ago. five years ago we had midday peak power prices. that is typical in most markets. now those are the lowest per price powered in the day. hours that is bad for a couple reasons. one, it is bad for gas because they have to operate at a loss just so they can capture the evening super peak. it's also bad for solar because they don't have the luxury. they can't pick the evening hours. they have to generate when the sun is up. what is interesting about what is happening now is that even though even though the whole solar power market is saying please no more solar in the middle of the day, california is mandating more solar on the roofs of new homes, as well as california cities saying we want to go 100% renewable. so they are requiring more solar. alix: it's interesting, and you say there is a demand and there is a supply, but if you look at a chart that shows the realized value of the different types of energy relative to the around-the-clock average price, the orange line is solar prices and the white line is gas
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prices, meaning you are profitable with gas and unprofitable in some ways with solar. amy: what it is saying is if you compare what gas is realizing in the market compared to a generator operating 100% of the time, gas can cherry pick the highest priced hours of the day. so they are always going to get a premium to the around the clock average. that is true in every market. what is interesting in california, what used to be pricingpturing peak above the around-the-clock average, now it is 30% below the around-the-clock average so the value of the solar is much diminished. alix: thank you so much, amy grace from bloomberg nef. here is what is on my commodity radar. you get china trade data out on monday. wednesday we will get earnings from freeport mcnamara to talk about that copper selloff. plus, bearish gold. and friday, it is big oil's turn. you get exxon and chevron are among the big names reporting. that is it for us. tune in every thursday at 1:00 p.m. this is bloomberg. ♪
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scarlet: i am scarlet fu. this is "bloomberg etf iq," where we focus on the assets, risks, and rewards offered by exchange rate funds. ♪ scarlet: primed to take stock. with the second quarter earnings season upon us, investors are sticking out positions in financials, often leveraged etf's. straddling the active and passive world. where does a manager fit in, and where does he see the value of smart value etf? we speak with patrick o'shaughnessy


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